Mar 24, 2016 - given its PE Ratio of 12.3 and its historical EPS growth rate of 46.2%. ... fundamental analysis and buil
Guru Stock Report FEDERAL SIGNAL CORPORATION (NYSE: FSS) INDUSTRY: Auto & Truck Manufacturers
Based on 3/24/2016 Close Price of $12.79
SECTOR: Consumer Cyclical
Reiterate B on 3/25/2016.
Current Rating: Buy
OVERVIEW
• This stock receives a fundamental grade of "B" based on Validea's Guru Analysis system. "B" rated stocks pass the fundamental tests of at least one of our guru strategies, although they do not pass the top performing strategies required to receive an "A" grade. Stocks that receive this grade typically have mostly favorable fundamental attributes, although there are typically some minor flaws. For further details on our scoring system, please see the FAQ section at the end of this report. • Validea's Guru System classifies this stock as both a growth and value stock given its PE Ratio of 12.3 and its historical EPS growth rate of 46.2%. • This stock passes Validea's P/E Growth Investor strategy based on our interpretation of the published criteria of Peter Lynch with a score of 93%. The strategy looks for stocks that trade at a discount to their long-term earnings growth rates, which also show signs of financial strength. • This stock passes most of the criteria of Validea's Value Investor strategy based on our interpretation of the published criteria of Benjamin Graham with a score of 86%. The strategy looks for deep value stocks that offer investors a "margin of safety" over their intrinsic value.
ANALYSIS SUMMARY
Strategy Name
Based On Book By/About
Score
Contrarian Investor
David Dreman
Book/Market Investor
Joseph Piotroski
Growth Investor
Martin Zweig
38%
Growth/Value Investor
James O'Shaughnessy
50%
Low PE Investor
John Neff
P/E Growth Investor
Peter Lynch
93%
Value Investor
Benjamin Graham
86%
Price/Sales Investor
Kenneth Fisher
60%
Patient Investor
Warren Buffett
0%
Momentum Investor
Validea
0%
29% 0%
0%
* Overall fundamental grade is based on a weighted scoring system in which the strategies at the top of the table are more significant than those at the bottom (the strategies used to determine our "A" rated stocks are above the dividing line in the table and the strategies used to determine the "B" rated stocks are below). Although all the strategies used in this report have exhibited market outperformance on a risk-adjusted
basis, strategies at the top of the table have displayed superior historical risk-adjusted performance in our testing to those at the bottom.
COMPANY PROFILE
Federal Signal Corporation designs and manufactures a suite of products and integrated solutions for municipal governmental industrial and commercial customers. Federal Signal Corporation and its subsidiaries operate 12 manufacturing facilities in six countries around the world. The Company operates in three segments: Environmental Solutions Safety and Security Systems and Fire Rescue. Environmental Solutions is a manufacturer and supplier of a range of street sweeper and vacuum trucks and waterblasting equipment for municipal and industrial customers. Safety and Security Systems is a manufacturer and supplier of systems and products that law enforcement, fire rescue, emergency medical services campuses, military facilities and industrial sites use to protect people and property. Fire Rescue is a manufacturer and supplier of vehiclemounted aerial platforms for fire fighting rescue electric utility and industrial uses.
RATING HISTORY
Date
Action
Old Rating
New Rating
11/9/2012
Downgrade
C
D
12/7/2012
Upgrade
D
C
5/10/2013
Downgrade
C
D
8/16/2013
Upgrade
D
C
3/14/2014
Upgrade
C
B
METHODOLOGY
This report provides a detailed analysis of FSS based on the publicly disclosed methodologies of Wall Street legends. Validea is a premier online independent research provider. The firm's Guru Stock Report unites the quantitative strategies of the world's most successful investors, including names like Peter Lynch, Warren Buffett, Ben Graham, Martin Zweig and many others. Rooted in fundamental analysis and built on core investing principles, each report contains an in-depth description of the guru methodologies, as interpreted by Validea, and examines the stock using multiple approaches (i.e. value, growth, momentum). Using these strategies, Validea has created a ratings scale that is dynamic and weights more heavily the best performing approaches as identified and tracked by Validea. Each stock is scored using a five point rating system that assesses the security's investment prospects. Ratings range from A to F (correlates to Strong Buy to Sell), with A and B stocks having the best potential for long-term market outperformance. Stocks that score highly based on the best performing risk-adjusted guru strategies or are favored by multiple top performing guru strategies are given a higher rating versus their counterparts. Validea's ratings are limited to companies that exhibit profitability. Reports are updated every two weeks, or sooner in the event of an earnings report, other significant news, or a major stock price change, in an effort to provide timely and valuable analysis and coverage.
GURU ANALYSIS OF: FEDERAL SIGNAL CORPORATION (FSS) P/E GROWTH INVESTOR BASED ON: Peter Lynch
SCORE: 93% STYLE: Growth/Value
Strategy Overview The P/E Growth Investor strategy is based on the book "One Up On Wall Street" by Peter Lynch. Lynch steered the Fidelity Magellan Fund to a total return of 2,510%, or five times the approximate 500% return of the Standard & Poor's 500 index. In his book, Lynch described a variety of strategies that individual investors can use to duplicate his success. These strategies divide attractive stocks into different
categories, each characterized by different criteria. Among those most easy to identify using quantitative research are fast growers,slow growers and stalwarts, with special criteria applied to cyclical and financial stocks.
Detailed Analysis DETERMINE THE CLASSIFICATION: This methodology would consider FSS a "fast-grower". P/E/GROWTH RATIO: [PASS] The investor should examine the P/E (12.34) relative to the growth rate (46.21%), based on the average of the 3 and 4 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for FSS (0.27) is very favorable. SALES AND P/E RATIO: [NEUTRAL] For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold. FSS, whose sales are $768.0 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate. INVENTORY TO SALES: [PASS] When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for FSS was 11.24% last year, while for this year it is 11.35%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (0.11%) is below 5%. EPS GROWTH RATE: [PASS] This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for FSS is 46.2%, based on the average of the 3 and 4 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate. TOTAL DEBT/EQUITY RATIO: [PASS] This methodology would consider the Debt/Equity ratio for FSS (10.87%) to be acceptable (equity is three to ten times debt). This ratio is one quick way to determine the financial strength of the company. FREE CASH FLOW: [NEUTRAL] The Free Cash Flow/Price ratio, though not a requirement, is considered a bonus if it is above 35%. A positive Cash Flow (the higher the better) separates a wonderfully reliable investment from a shaky one. This methodology prefers not to invest in companies that rely heavily on capital spending. This ratio for FSS (8.91%) is too low to add to the attractiveness of the stock. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria. NET CASH POSITION: [NEUTRAL] Another bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt. According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for FSS (4.01%) is too low
to add to the attractiveness of this company. Keep in mind, however, that it does not adversely affect the company as it is a bonus criteria.
VALUE INVESTOR BASED ON: Benjamin Graham
SCORE: 86% STYLE: Deep Value
Strategy Overview The Value Investor strategy is based on the book "The Intelligent Investor" by Benjamin Graham. Widely recognized as the father of securities analysis, Benjamin Graham argued for investing in stocks that were significantly undervalued relative to their intrinsic worth, which he measured principally by their future earnings potential. Defensive investors who followed his advice, he said, would enjoy an invaluable "margin of safety" in their investment activities. Graham's defensive investor strategy is considered by many to be the ultimate value strategy and has stood the test of time more than perhaps any strategy ever created.
Detailed Analysis SECTOR: [PASS] FSS is neither a technology nor financial Company, and therefore this methodology is applicable. SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. FSS's sales of $768.0 million, based on trailing 12 month sales, pass this test. CURRENT RATIO: [PASS] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. FSS's current ratio of 2.69 passes the test. LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for FSS is $43.7 million, while the net current assets are $197.9 million. FSS passes this test. LONG-TERM EPS GROWTH: [PASS] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. FSS's EPS growth over that period of 91.7% passes the EPS growth test. P/E RATIO: [PASS] The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. FSS's P/E of 12.34 (using the current PE) passes this test. PRICE/BOOK RATIO: [FAIL] The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. FSS's Price/Book ratio is 1.96, while the P/E is 12.34. FSS fails the Price/Book test.
VALUE INVESTOR BASED ON: Benjamin Graham
SCORE: 86% STYLE: Deep Value
Strategy Overview The Value Investor strategy is based on the book "The Intelligent Investor" by Benjamin Graham. Widely recognized as the father of securities analysis, Benjamin Graham argued for investing in stocks that were significantly undervalued relative to their intrinsic worth, which he measured principally by their future earnings potential. Defensive investors who followed his advice, he said, would enjoy an invaluable "margin of safety" in their investment activities. Graham's defensive investor strategy is considered by many to be the ultimate value strategy and has stood the test of time more than perhaps any strategy ever created.
Detailed Analysis PRICE/SALES INVESTOR BASED ON: Kenneth Fisher
SCORE: 60% STYLE: Growth/Value
Strategy Overview The Price/Sales Investor strategy is based on the book "Super Stocks" written by Kenneth Fisher. Fisher is a money manager, best-selling author and long-time Forbes columnist who wowed Wall Street in the early 1980s when his book first popularized the idea of analyzing price-to-sales ratios (PSR) as a means of identifying attractive stocks. The strategy looks for stocks whose low price-to-sales ratios are accompanied by strong earnings growth, little debt, and positive free cash flow.
Detailed Analysis PRICE/SALES RATIO: [FAIL] The prospective company should have a low Price/Sales ratio. Smokestack (cyclical) companies with Price/Sales ratios greater than .8 are considered very unattractive and should even be sold according to this methodology. FSS's P/S ratio of 1.04 based on trailing 12 month sales, exceeds the acceptable level for cyclical companies, being extremely unfavorable. TOTAL DEBT/EQUITY RATIO: [PASS] Less debt equals less risk according to this methodology. FSS's Debt/Equity of 10.87% is acceptable, thus passing the test. PRICE/RESEARCH RATIO: [PASS] This methodology considers companies in the Technology and Medical sectors to be attractive if they have low Price/Research ratios. FSS is neither a Technology nor Medical company. Therefore the Price/Research ratio is not available and, hence, not much emphasis should be placed on this particular variable. PRELIMINARY GRADE: No Interest in FSS At this Point Is FSS a "Super Stock"? NO Price/Sales Ratio: [FAIL] The Price/Sales ratio is the most important variable according to this methodology. The prospective company should have a low Price/Sales ratio. FSS's Price/Sales ratio of 1.04 does not pass this criterion.
LONG-TERM EPS GROWTH RATE: [PASS] This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. FSS's inflation adjusted EPS growth rate of 43.89% passes this test. FREE CASH PER SHARE: [PASS] This methodology looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses. This is based on the premise that companies without cash will soon be out of business. FSS's free cash per share of 1.14 passes this criterion. THREE YEAR AVERAGE NET PROFIT MARGIN: [PASS] This methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. FSS's three year net profit margin, which averages 12.96%, passes this criterion.
GROWTH/VALUE INVESTOR BASED ON: James P. O'Shaughnessy
SCORE: 50% STYLE: Growth/Value
Strategy Overview The Growth/Value Investor strategy is based on the book "What Works on Wall Street" by James P. O'Shaughnessy. In the book, O'Shaughnessy back-tested 44 years of stock market data from the comprehensive Standard & Poor's Compustat database to find out which strategies work and which don't. To the surprise of many, he concluded that price-to-earnings ratios aren't the best indicator of a stock's value, and that small-company stocks, contrary to popular wisdom, don't as a group have an edge on large-company stocks. Based on his research, O'Shaughnessy developed two key investment strategies: "Cornerstone Growth" and "Cornerstone Value", both of which are combined to form this strategy.
Detailed Analysis MARKET CAP: [PASS] The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. FSS, with a market cap of $798 million, passes this criterion. EARNINGS PER SHARE PERSISTENCE: [FAIL] The Cornerstone Growth methodology looks for companies that show persistent earnings growth without regard to magnitude. To fulfill this requirement, a company's earnings must increase each year for a five year period. FSS, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.21, 0.35, 2.41, 0.94 and 1.04, fails this test. PRICE/SALES RATIO: [PASS] The Price/Sales ratio should be below 1.5. This value criterion, coupled with the growth criterion, identify growth stocks that are still cheap to buy. FSS's Price/Sales ratio of 1.04, based on trailing 12 month sales, passes this criterion. RELATIVE STRENGTH: [FAIL] The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. FSS has a relative strength of 47, which is not in the top 50. Therefore, it would fail the overall methodology.
Frequently Asked Questions What is Validea's Guru Analysis? Guru Analysis provides an in depth analysis of any stock using Validea's interpretation of published writings by or about 10 of history's best investors including Peter Lynch, Benjamin Graham, Warren Buffett, James P. O'Shaughnessy, the Motley Fool, David Dreman, John Neff, Kenneth Fisher and Martin Zweig. With Guru Analysis you can analyze any stock step by step using any one of these strategies and can see exactly why the stock passes or fails each methodology. What type of investors can use Validea's Guru Stock Reports? Validea's Guru Stock reports are geared toward long and medium-term investors. The vast majority of the investors that our guru strategies are based upon were long term investors. The reports can be utilized by both value and growth investors because there are multiple methodologies within the report that appeal to each investment style and several that combine both. What does the Validea Rating overall letter grade indicate? The Validea Rating indicates how well the stock meets the investment criteria of the 10 strategies in this report. The strategies with the best historical risk-adjusted performance are weighted more heavily in determining the letter grade. The letter grades are determined as follows. A - "A" rated stocks receive a score of 90% from at least one of our top tier guru strategies. Our top tier strategies are based on our interpretation of the published writings of David Dreman, Joseph Piotroski, James P. O'Shaughnessy, John Neff and Martin Zweig. Stocks in this category exhibit the fundamental criteria that have proven most predictive of future stock performance in our historical testing.
B - "B" rated stocks receive a score of 90% from at least one of our second tier guru strategies. Our second tier strategies are based on our interpretation of the published writings of Peter Lynch, Warren Buffett, Kenneth Fisher and Benjamin Graham. Stocks in this category exhibit the fundamental criteria that is sought by these strategies. These strategies have all exhibited strong risk-adjusted performance in our historical testing. C - "C" rated stocks have an average score from all of our strategies of at least 25%. Stocks in this category typically exhibit elements of fundamental strength, but also have some noticeable weaknesses. D - "D" rated stocks have an average score from all of our strategies between 20% and 25%. Stocks in this grouping typically have several major fundamental weaknesses that would not be looked upon favorably by both value and growth investors. F - "F" rated stocks have an average guru score from all of our strategies below 20%. Stocks in this grouping typically have many major fundamental weaknesses that would eliminate them from any consideration by our guru strategies.
What do the individual guru scores mean? The scores for each strategy represent a weighted percentage of how well a particular stock meets a guru's criteria. Not all criteria are weighted equally and some of our strategies have criteria that are important enough to automatically result in a 0% score if they are failed. For example, in the Patient Investor strategy based on Warren Buffett, a stock will automatically fail if it does not meet the requirement of consistent earnings over the past 10 years. Is there any affiliation between Validea and the gurus that the strategies are based on? No, the names of individual investment advisors (i.e., the 'gurus') appearing in this report are for identification purposes of his/her methodology only, as derived by Validea.com from published sources, and are not intended to suggest or imply any affiliation with or endorsement or even agreement with our
reports personally by such gurus, or any knowledge or approval by such persons of the content of this report. DISCLAIMER: The use of the name of a financial analyst, identified as a "guru" represents the interpretation by Validea of that person's key investment analysis principles, as derived from published sources. The use of a guru's name does not mean that he personally endorses, or even agrees with any of the representations made with respect to specific securities as derived by Validea from its interpretation of his or her investment methodology. Validea IS an information service for financial institutions, investors and traders. Validea IS NOT an investment advisor, hence it does not endorse or recommend any securities or other investments. The information in this report is not intended as a recommendation to buy or sell securities. Market prices and certain other information in this report have been carefully compiled from publicly available sources believed to be reliable and are for general informational purposes only. Accuracy or completeness of the information contained herein is not guaranteed and is not intended to be relied upon for transactional purposes. Neither Validea, its publishers, owners, investors, nor any of its data or content providers shall be liable for any errors or delays in the content, or for any actions, losses or damages, monetary or otherwise, taken in reliance of such information, judgments and opinions thereon. Fundamental data provided by Reuters Validea does not make markets in any of the securities mentioned in this report. Validea does not have investment banking relationships with the firm whose security is mentioned in this report, and in general, does not engage in Investment Banking activities/services. Validea and its employees may have long/short positions or holdings in the securities or other related investments of companies mentioned herein (if so, the holdings may, or may not be fully disclosed herein). Officers or Directors of Validea are not Directors or Officers of covered companies, and no-one at a covered company sits on the board of Validea. Neither Validea nor any of its employees own shares equal to one percent or more of the company, or any companies mentioned in this report. Contact Info: Validea.com For More Information: http://www.validea.com Email:
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